Moody's: How Supply Chain ESG Rules are Reshaping Business

As global regulations tighten, businesses face a rising tide of operational costs and compliance challenges tied to climate risks.
Moody’s 2025 ESG Outlook highlights how these evolving rules are reshaping the financial landscape, linking rated debt to higher exposure to environmental and labour-related risks.
“Policymaker and investor focus on environmental and labour practices in supply chains ... will raise operational and compliance costs as well as regulatory and reputational risks,” Moody’s warns.
The implications are clear: companies falling short of these standards risk financial penalties, diminished credit ratings and reputational harm.
How tightened supply chain rules are reshaping business
From 2025, new regulations such as the Corporate Sustainability Reporting Directive (CSRD) and EU Deforestation Regulation will require companies in the European Union to report on their sustainability practices. By 2027, the Corporate Sustainability Due Diligence Directive (CSDDD) will extend these obligations further.
Meanwhile, the EU’s Carbon Border Adjustment Mechanism (CBAM) adds another layer of complexity. This regulation compels suppliers to disclose their carbon emissions, prompting many European importers to pivot toward lower-carbon producers.
China is also already expanding its Emissions Trading Scheme (ETS) to decarbonise domestic industries, whilst similar proposals are gaining traction in the US.
As these rules take hold, businesses face increasing costs tied to compliance, reporting and reconfiguring supply chains. Companies producing commodities like cocoa and palm oil—key targets of the EU’s deforestation regulations—are particularly vulnerable, especially in emerging markets.
Reputational risks are also growing. Investors, consumers and regulators are now scrutinising supply chains more closely. For suppliers, retaining contracts often means investing in measures to mitigate social and environmental risks.
Plastics and packaging: A new frontline
While climate risks dominate the ESG conversation, plastics are another battleground. Efforts to finalise a global plastics treaty stalled in December 2024, but the EU moved forward with stricter recycling mandates under its revised packaging directive.
By 2025 and 2030, companies in consumer goods and beverages must meet higher recycling targets and adhere to restrictions on single-use plastics.
For businesses, this translates into higher costs for waste management, tracking and investment in sustainable packaging. However, manufacturers that already use recycled materials stand to gain, as increased demand for recycled content will drive industry growth.
Could debt ratings indicate climate risk?
Moody’s credit analysis underscores how ESG factors influence debt ratings. Of the 12,610 entities it tracks, ESG attributes negatively impact ratings for 17% of issuers, with 3% experiencing significant credit downgrades. For another 26%, the risks are limited but likely to increase over time.
Sectors with high exposure to climate risks, including automotive, power and heavy industry, face mounting financial pressures. Natural capital conservation and agricultural land use are also becoming focal points of decarbonisation strategies. Moody’s' environmental heat map highlights 16 sectors with US$5tn in rated debt, all of which have high or very high carbon transition risks.
For emerging markets, financing the transition remains a challenge. Although advanced economies agreed to boost climate investment to US$300bn annually by 2035 at COP29, this falls far short of the estimated US$1tn needed. Innovative financing tools, such as blended finance and sustainable debt, are critical.
Meanwhile, advanced economies benefit from favourable economics of green technologies and strong policy support. Clearer definitions for transition finance could also help reassure investors wary of greenwashing, encouraging growth in green and labelled debt markets.
As regulations evolve, businesses must adapt quickly. From stricter supply chain rules to escalating climate risks, the road ahead demands both strategic investments and robust sustainability commitments. With climate concerns now integral to credit ratings, the stakes for businesses have never been higher.
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